this is "options action." tonight, breaking the bank. financial get slammed on fears of a financial slowdown. fear not, we have got a trade on jp morgan that can make you money. and we will break it down. plus too hot. the national heat wave has sent food prices soaring. cornering the commodities market with a trade that could grow your portfolio in a hurry. >> and why were they sneaking a peek at limited calls? scott nations on why options traders are looking for limited exposur exposure. "options action" begins now. live from the nasdaq narcotic site, the world's largest exity exchange, i'm melissa lee.

we'll get to the trades in a moment. whacking stocks today, tech and industrials among laggards. the action more about the u.s. economy or the turmoil in europe? let's go the money right now. the stocks are down about 2:00 where there was a wall street journal headline that qe 3 was still on the table by the fed. >> i would say the interesting thing that i saw today if we look at text stocks. that immediately had an impact on vmc and sales force.com. a company focused on the cloud reported that europe is week, and that immediately had an impact. stocks started going lower on the back of this. we have seen the story before on the global recession fears. we saw cat tractor talk about china being weak. we saw proctor & gamble.

i see a potential global recessionnary scenario that the market seems too complacent. >> we saw the earnings. >> we saw negative activity on cat and alcoa. is the bar set too high as we go into earrings season as we start with alcoa. >> we will certainly see some lowering. we saw a put buy into 2013. >> we saw a lot of negative activity, put buying and call selling. intel ahead of hearings, and also in eem. and certainly there is concern very short term, but i don't know liken mis, if i'm that negative that a recession is many coing. i think there is a slowdown, but when the market sells off, there is an opportunity to jump in and buy it. >> i don't think it's all that apocalyptic. the problem with the number is that it was worse than expected. it was no so much worse that everybody could start to rely on the fed. through qe 12, whatever is next. the vix was in quite a bit

today. it was down quite a bit in the middle of the day and there were terrible horrible names like chesapeake and green mountain and netflix, all up today. >> i'm not saying there is necessarily a global recession immediately on the horizon but i do think the market is far too complacent. 4% from the highs. >> mike khouw, where are you walking? on the sunny side of the street or the apocalypse? >> probably closer to the apocalypse. i don't exactly how you understand how you can get bad news. i think the vix is way too complacent here. it doesn't matter if we get qe 4 or 5 when one, two, and three are possibly not working. we see big inflation in the fed's balance sheet, but not having a big impact on the total amount of nonfinancial lending. i think we have a very risky

situation. the level of unemployment that we're seeing is one of the most prolonged in 60 years. i think that's one of the things that you have to pay attention to, even if earnings are good right now, you have to pay attention to what they are saying, is and what we're hearing is that they aren't that great going forward. i think people should really look at buying protection. >> the vix closed at 1710 the average vix close back to 1990, is 1726. you can't say it's too low right here. >> to mike's point about weak jobs data, melissa, today was the first time we had four straight monthly misses to expectations on the payrolls data since 2008/2009. before that, june 2007 to october 2007. that's recession ear type data, and there is a chart i pulled up today from google trends that shows how many times people are working for the word recession.

in december 2007, the market. that's when the recession started. >> they are saying we're not recession. >> he excluded the not part of the phrase. what are you saying? how do you interpret the vix being at 17 or so? >> the vix has basically been aren't the 20 level. when the market sells off, i'll buy the market, and when the market rises, i'll sell the rips. and you will see this range-bound market. that's what vix is telling you. you can continue to play that and when we see a sell-off, i want to own it. you talked about qe3 on the table, that's an inherent put in the market. when we get the sell-off, and to mike's point, look to stay protect. the vix is cheaper on an average historical basis. you get long the market. >> a big week for earnings. next week, starts off with alcoa after the bell and we also get

results from the financial sector. wells fargo, jpmorgan. and jpmorgan is the name everyone is watching. enis, at this point, we have the london whale trading loss and the potential libor investigation over the entire industry. >> three main reasons i'm bearish. one is regulatory scrutiny, not just the whale trade loss on its own, but ongoing futures earnings loss that will result from that, and, in addition, earnings expectations are up 25% for jpmorgan, 2012 to 2013. i don't see that, given the loss of earnings power, and finally, european stresses are still out there. we saw the spanish yield touch 7% today. >> financials have been a laggard, in terms of sector bets, brian, any section to the bets on the sl, for instance. >> certainly, the xlf is lagging

the last couple of days. jpmorgan, a top holding in the slf. that will have a drag on it a heck of a tough time with jpmorgan. i own it myself. i continue to write calls to help lower the break even point. it's been a tough trade to stay long on the stock and the financials for that matter. really, wells fargo, wr earnings next week. one standout as a way to play to the long side, i look to do that come monday or tuesday. >> that's a tale of two different kinds of banks. one bank with wells fargo being the more domestically leveraged bank. >> the interesting thing about jp morgan is to look at the quality of the earnings. if they make their number by crawling back a bunch of loan earnings, that doesn't count. two things. there will be a huge surprise and we also will have to find out where they stand on the

london whale trade. what's the number? >> once the first of the cohorts report, what happens to the volatility of the rest of the players? >> well, i think it's probably safe to say we will see some of them come in. some of this is a stock specific story. we have not mentioned the fact that there is a power trading scandal in the midst of all of this as well. there is a lot of things and head winds here. i am interested to hear scott reiterate some of those. let's face the facts here. we are dealing with a financial crisis. if it's bad for financials, it's bad for stocks. >> ennis is putting on the trade tonight, he is bearish. he is going to put on a call straed. usually we buy them. so that would open a play book. to define your risk, buy a higher call at same expiration. you want it to be below the call. enis, what's the trade? >> earlier today, when jpmorgan

trading at $34, i sold the august 35/37 call spread for 65 cents so what am i doing here? i sold the august 35 calls at $1.15, and to reduce my risk, minimize my risk, i bought the august 37 calls at 57 cents. i collected 65 cents on the trade with a max risk of $1.3 if the stock worst-case scenario. how does the stock make money? i need jpmorgan to be below 35.65. the great thing about this trade, is that i can make money in the stock goes sideways if it does up not past $34. this is a great way to press a short position. i'm short through other trades, because the stock is already down 5% and the volatility is

elevated into the earnings. we had a graphic that showed the average move is 2% in the last eight quarters, and a 4.5%. a good way to take advantage. >> what do you think of the trade? >> i definitely think that the way to play these types of trades, xwied moved too high, i like the bearish bet and typically we want to be short the lower strike option and like being long put spreads and short call spreads, the math works for you as scott is so found of saying. >> as somebody who is in jpmorgan as a trade, what do you make of it. >> still long on the stock and selling calls to the similar to the types of trades ennis laid out. his doesn't have a long stock component to it. book value, around $34. t you have to be careful it doesn't get a bounce. and the break even on the trade. >> i'm laughing because the book value argument, really, that really -- that haven't worked

for a very long time. that isn't a good reason. >> hasn't helped citigroup or morgan stanley. >> right. >> if they are losing $9 billion on a trade nobody knows about, what is the book value certainly. that could be a level of support for the stock. >> wrap this up, hit the old stocks vs. options button. shorting stocks carries unlimited risk. ennis's call spread sales, 65 cents and defines his risk. a question out there? send an e-mail, optionsaction@cnbc.com. we'lltance on options extra after the show. we'll also post trade recaps there as well. here is what's coming up next. too hot. the heat has wreaked havoc on crops across the globe and sent the price of food soaring, when we come back, khouw and carter heading down to the farm to put

some of that money back in your pocket. time for "pump up the volume" names heating up the sizzle index this ek would. this retailer best known for its hush-hush apparel brand. with over 1,000 store locations, it's not much of a secret. speaking of intimate, they are in your bath too. options traders made a splash in the call volume, hoping clean up in the stock bubbles higher. who is it? options action when "options action" returns. and you don't want to miss it with thinkorswim by td ameritrade. you get knock-your-socks-off tools, simple one-click orders, real-time paper trading to hone your skills, plus anytime you need it support. ♪ stocks, options, futures, and forex. get your trading on track. thinkorswim by td ameritrade. trade commission free for 60 days,

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where were options traders pumping up the volume this week? limited brands. call volume five times the average daily volume. welcome back to "options action," you heard how limited brand calls were very active this week and scott, limited was an example of one of the few retailers out there that actually beat on the same store sales number. this happened on thursday. just after the company announced that same store sales were up more than expected. and we saw people reaching to buy calls. implied volatility that day, up about 7%. obviously people really reaching to buy calls a lot more. >> let's talk about the hot weather that gripped the nation here. record heat pretty much across the whole country. and that has led to an increase in the cost of food. how much longer will the heat wave last?

todd santos with the weather channel. any relief in sight? >> yes, melissa. that's the easy answer to the thing. when you look at it, that will bring in some of the cooler temperatures. this gives you an idea of when we see the relief. it shows up early this week. trough digging in, bringing in cooler temperatures across a good stretch of the ohio valley. through the mid-atlantic, still going into the weekend, a lot of areas with excessive heat watches and in some cases excessive heat warnings in the darker colors there. 25 states plus d.c. metro, so there are still a number of spots within there that are dealing with a lack of power. chicago, 95 degrees. by sunday, you will start to feel some of the relief. places like st. louis, eagerly hoping for that relief, considering you have had nine plus days with 100-plus degree heat. 105 in d.c. for you it will get worse before

it gets better and through sunday, relief starts to come in with the frontal boundary and saturday through new york city, even over toward noortd, severe thunderstorms, so that cooler air will come at a price. a look at saturday across a good stretch of the heartland of the country. st. louis, 106 for saturday. sunday, the next chance to top off below the 100-degree mark. and there is a look into monday. a good stretch of the region, temperatures much closer to what you would see on average this time year. a couple areas, looking for thunderstorms. i did also -- those areas for today, as far as severe potential. the northeast, i mentioned it. a lot of viewers head out toward long island, montauk, keep in mind, saturday the best chance to see severe storms. the good news with that we'll see cooler air that will likely last through a good stretch of the coming week. melissa. >> thank you, todd santos, of the weather channel. 95 relief for chicagoans, my heart goes out to you. we know the weather now. we have certainly seen the

impact on soft commodities like corn and wheat. let's call to the charts with the sal of the earth himself, carter braxton wirth of oppenheimer. >> crop prices declining rapidly because of the heat and lack of precipitation. a record number of acres s enow. a long-term chart going back to the '5 0z. corn at all time highs. they spike and collapse, they spike and collapse, because they are weather related. corn and soybeans, two biggest crops in the united states. here too, at or near all-time highs, and basically drought scares, the price action usually starts to top out before the crop declines in terms of conditions come to annen. here is what we're looking at. it's the dba, it's an etf which picks up a lot of different

commodities. corn and soybeans the two biggest commodities. this leaves us at a very difficult level. a lot of overhead supply. the exact same chart. this just shows the trend this has been in for the better part of 18 months, here too another way to look at it, a big move to a difficult level and to put this in context, take a look at the dba, same two-year chart, relative to all commodities and spiked oil, among other things this is well ahead of itself from our point of view, we think it's right to fade it. >> time to fade it. mike what do you say? being long in corn at this point is like being long in drought? >> i think that's exactly right. we're expecting reports on monday that tells us about crop yields and soil moisture contents. a lot of people baking in reduced crop yields, as carter pointed out.

75-year highs in terms of the amount of acres of corn planted. the weather will eventually turn around. in sugar is another part of the dba we're talking about here. rain, the dollar strengthening, and the demand side, start to get in a situation where extended droughts, a much higher feed cost. you might see some herd calling that could reduce demand as well. >> mike, buying a put. simplest trade you can do, but good to open the playbook and see how it works for those new to the show. you want the stock to fall below the cost of the put. above that you will see losses. mike, walk us through. >> i was just looking at the august 29 puts. 65 cents for those. one of the things that carter's graphs illustrated is how commodities can remain stable for a while and get extremely volatile. one of the reasons why you shouldn't go out and short this thing outright.

we haven't seen as much of a pop in implied volatility. are you only spending 2.2% of the price if it goes down 5%. down 10%, quadruple it. a very nice risk adjusted way to make a bearish bet in commodities. >> i think, mike, you make a great point. options aren't cheap in those august options. i actually purchased the august 28 put myself, and not knowing what the trade was, i purchase thad thursday morning. those options are cheap. get the dba flowing down. carter talked about spikes and sales off very hard. however, i think we're in dire conditions. not mad max type conditions. i sold the january 27 put against them. i am bullish on the dba, bullish on corn prices, soybean prices. it's been hot as all heck in the midwest right now, and if you go out and look at the farm fields, they are not doing well. yes, a big planting season this

year, but they are struggling, we need rain right now in the next week. very critical for corn. >> in the chicago trading world this is what have you been hearing about this week. dba, not a name we talk about a bunch. i was surprised when i looked at how expensive options are, they are not very expensive. mike is certainly speculating on weather moderating in the midwest. that's fine as long as you understand it. i will say eight calls in dba traded for every put that traded. what's that saying? mike is on the option side of the trade from the herd, and i love to be on the opposite side of the trade from the herd, because when they have to get out of it, they're coming to me. >> one more time on stocks versus options, want to short the dba? could be betting the farm, ha ha. mike's put purchase defines his risk to just $65. our thanks as always to carter braxton worth of oppenheimer. up next, the final word from the

options pits. and you don't want to miss it with thinkorswim by td ameritrade. you get knock-your-socks-off tools, simple one-click orders, real-time paper trading to hone your skills, plus anytime you need it support. ♪ stocks, options, futures, and forex. get your trading on track. thinkorswim by td ameritrade. trade commission free for 60 days, plus get up to $600 when you open an account.

>> get more with our newsletter delivered directly to your inbox, packed with information and analysis. this is the extra edge you need. >> with the summer olympics just a hop, skip, and a jump away, one athlete is unlikely to make china's squad. after missing the first two, the man blasted through the remaining hurdles chest first. he still managed to take home an impressive sixth place finish and that is what we call optional viewing. >> time now for the final call. scott? >> i'm not as pessimistic as some people, but if you need protection, buy in the s & p. >> don't be complacent. recession fears, once everyone knows about them, lit be too late. >> i like the dba put buy but selling a longer dated you put in case dba moves hue err.

>> bear protection is cheap you have to buy some. >> our time has expired. stay tuned for "money in motion." and you don't want to miss it with thinkorswim by td ameritrade. you get knock-your-socks-off tools, simple one-click orders, real-time paper trading to hone your skills, plus anytime you need it support. ♪ stocks, options, futures, and forex. get your trading on track. thinkorswim by td ameritrade. trade commission free for 60 days, plus get up to $600 when you open an account.